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The Health-Finance Debate Reaches a Fever Pitch

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Opinion pieces and speeches by EPI staff and associates.


The Health-Finance Debate Reaches a Fever Pitch

By Elise Gould

A debate over health care is raging in the United States, and it’s not even a presidential-election year. Health care was the top economic issue concerning Americans in polls following the midterm election. And Republicans and Democrats have been proposing their alternative visions of the best health-care system, some plans focusing more on covering the uninsured, others more on tackling rising medical costs.

The rhetoric falls into two basic camps: more government control versus free markets. As in other areas of public policy, one side argues for community responsibility, shared risk, and a more active regulatory role for government. The other argues for less government intervention, pure market mechanisms, and individual responsibility.

I’m a progressive, and a colleague and friend of the progressive authors I will be discussing. I firmly believe in the substantive advantages of public financing of health care. But I favor a policy of universal health coverage that combines the best of big government (large pooling, cost containment, and quality control) with the competitive efficiency of the private market. Let me explain why through a survey of some recent books.

In this conservative era, a slew of writers, economists, lawyers, and physicians are finding it enticing and easy to publish books supporting the status quo. David Gratzer, a physician and senior fellow at the Manhattan Institute, is a perfect example. In The Cure: How Capitalism Can Save American Health Care, he clearly outlines the historical and ideological backdrop for the conservative vision.

Gratzer’s accessible account is filled with wonderful anecdotes and fascinating historical details. After explaining the rise of HMO’s under Nixon and the precursors that led to the institution of health-savings accounts in 2003 as part of legislation revamping Medicare, he puts forth a clear and concise plan for health-care reform. The thesis of his book is explained best in the foreword by the late Milton Friedman, the grandfather of these ideas. Friedman argues that tax policies regarding employer-provided health insurance encourage plans with high premiums and low cost sharing. Those, he says, have contaminated the relationship that existed between physicians and patients, and have encouraged overuse of medical care by buffering the insured from the true costs they incur. Market discipline has been diluted on the part of both physician and patient, driving up costs, increasing bureaucracy, and leading to widespread dissatisfaction with America’s health system.

According to the conservative view, the crux of the problem is “moral hazard,” which means, in this context, that consumers buy too much health care because they don’t fully pay for it. Overinsurance in health care spurs people to spend medical dollars unwisely. Because their insurance is so generous, most consumers pay little of the cost of doctors’ visits, tests, and hospital stays — and may not even know the total cost. If they had to pay more, they would reduce their consumption, providers would be forced to compete based on price, and prices would go down.

Gratzer contends that consumer-driven health care would facilitate patient choice and lead to cost control. Of course another way of saying that is: The consumer would bear more of the financial burden and spend less. That’s the idea behind high-deductible health plans and health-savings accounts. A high-deductible plan forces the consumer to pay out of pocket for all health services until the deductible is reached, at which point the insurer begins to pay a portion of the expenses. A health-savings account allows people with qualifying high-deductible health plans to put money into an account where it will accrue tax-free interest, then be distributed tax free for health expenditures.

Gratzer claims that this type of “patient choice can be used to insure the uninsured, provide cheaper prescription drugs, and even save Medicaid and Medicare.” He says it will also solve the growing problem of uninsurance, which he argues is less of a problem than people think anyway. A full half of the 47 million uninsured Americans have “ready access to health insurance,” he contends. Apparently, the only thing needed is “to entice people into the health-insurance market” — as if people don’t understand the value of insurance, and as if once they understood it, there’d be no barriers to insuring them except for “expensive state regulation.”

I’ll grant that different surveys show different figures for the number of uninsured, either at a point in time or over a whole year. However, Gratzer’s assertion that those figures refer to different people at any given point in a given year only strengthens the evidence of a worse problem. The economic literature shows that churning — moving in and out of being insured — makes it less likely that consumers will have a usual source of care or seek care when they need it. Therefore, people who lapse into and out of uninsurance act a lot more like the uninsured than the insured. The Yale political scientist Jacob S. Hacker, in The Great Risk Shift, writes that one out of three nonelderly Americans went without health insurance at some point in the two-year period beginning in 2002. That instability, he says, affects a much larger portion of the country than the 47 million figure implies.

In Gratzer’s discussion of the uninsured, he boldly suggests that legal immigrants skew measurement of the number of uninsured. “The difficulties faced by noncitizens are serious, but they speak to an immigration issue, not the failings of the health-care system,” he writes. Nearly half of the uninsured in California didn’t see a health professional in the last year, and Gratzer cites that as evidence that they didn’t want or need insurance. But isn’t it more likely that they didn’t seek care because they didn’t have insurance to pay for it?

Still, Gratzer’s problems with Medicare might pique some progressive interest. He claims that Medicare is expensive, and its structure, while requiring small to no copayments, leaves senior citizens subject to catastrophic bills, despite most seniors’ supplementary insurance. Gratzer points to the Federal Employees Health Benefits Program as “the nation’s most successful health plan, and it works because it offers federal employees a choice from more than 240 competing plans.” Here he sounds almost like a number of recent progressive presidential candidates.

But that’s where the harmony ends. A majority of countries in the developed world provide universal health insurance for less money, with arguably better outcomes and with undisputedly less inequality, than America does. Those countries with universal coverage, he writes, “end up rationing care in the most draconian ways.” Yet clearly he doesn’t object to the American rationing of health care, by income, although one could argue that that is rather draconian, too.

Gratzer recommends solving the over-insurance problem by making health care “truly individual and portable,” not only though health-savings accounts and high-deductible plans, but through measures to strengthen the individual-insurance market. But he overplays the cost savings in premiums of high-deductible plans over more-comprehensive coverage. A Kaiser Family Foundation study finds only small differences in premiums between such systems.

Gratzer argues that health-savings accounts are affordable. And if you raise the cap, he writes, “people will see HSA’s as a long-term savings ve

Finally, he’s called health-savings accounts what they really are. And they work best for those people who have maxed out on their other tax-preferred savings vehicles.

Gratzer also makes a common mistake (among conservatives and progressives alike) in his discussion of the popularity of health-savings accounts, confusing enrollment in an account-qualifying plan with actually having money in one. While people may be enrolled in a high-deductible health plan, many are in fact not saving enough to cover the deductible.

He also overstates the benefit of health-savings accounts to the uninsured. A small tax advantage is a drop in the bucket for uninsured families facing premiums in the thousands of dollars. Why advocate increasing the contribution amount if so few are at the cap? How would that aid in controlling costs or increasing transparency of information and costs? And if Gratzer is so concerned with our being responsible health consumers, why, when it comes to the government as Medicare provider and health purchaser, does he not favor the government’s being able to bargain for the best prices that it can get, too?

Several other recent books have made arguments similar to Gratzer’s, including The Business of Health: The Role of Competition, Markets, and Regulation, by Robert L. Ohsfeldt, of Texas A&M University, and John E. Schneider, of the University of Iowa; and Crisis of Abundance: Rethinking How We Pay for Health Care, by Arnold Kling, an adjunct scholar at George Mason University.

Ohsfeldt and Schneider argue for a redesign of “health insurance to imbue a greater degree of price sensitivity within health-services transactions.” High-deductible health plans, they say, offer “a promising vehicle through which to introduce greater price sensitivity in health-care markets” and “better price information.” In his simply written and concise book, Kling, too, sets out many of the same themes as Gratzer, discussing overinsurance, for instance, in a chapter differentiating between insurance and financial “insulation.” Kling argues that insurance should “cover only large, unpredictable expenses,” whereas what people call insurance today is really a form of insulation that “provides an incentive to overconsume health-care services in the gray area, where the service is not absolutely necessary and may not be cost-effective.” He recommends lessening the government’s role and increasing the consumer’s role in Medicare by raising the minimum age of eligibility and encouraging the use of health-savings accounts. He also argues for expansions in the individual-insurance market, reductions in tax benefits to the employer market, and eliminating barriers to the purchase of insurance across state lines.

The new conservative vision isn’t only about individual insurance, more knowledge about one’s own health-spending practices, and cost-containment strategies. It’s also about a more-limited role for government in the oversight and approval of patents, and about restricting patients’ ability to sue for damages against doctors, hospitals, and the pharmaceutical industry. Richard A. Epstein’s Overdose: How Excessive Government Regulation Stifles Pharmaceutical Innovation takes on the Food and Drug Administration and the tort system in defense of more-efficient but markedly less government intervention, and more protection for drug companies against devastating court claims.

Epstein, a professor of law at the University of Chicago, begins with an astute discussion of medical invention and the creativity required to develop breakthrough drugs that can have a big effect on health outcomes and keep drug companies in the black. He then launches into a philosophical and legal analysis of property rights, weighing private-property rights against the difficulties of coordination in a system of joint ownership. He offers a detailed description of the conflicts of interest that arise among players in government, academe, and the private sector; contends that government support is important and necessary; but dismisses the idea that an increase in government-supported research could still rely heavily on a decentralized, apolitical system of peer-review panels.

Through anecdotes and examples from court cases, he illustrates the drug companies’ undue risk when forced to go to trial, and he describes lawyers’ manipulations in arguing their cases in front of nonexpert juries. He argues that the “tort system merges efforts at compensation and deterrence in a single system,” a flawed combination. Not surprisingly, his preferred — though admittedly politically difficult — solution would be to limit regulation and court action while strengthening contracts. He acknowledges that “regulation is here to stay,” but says that perhaps an administrative system (while not his ideal) would be preferable to a criminal one in keeping tort claims in line.

Epstein’s recommendations match up eerily well with those of the pharmaceutical industry. The fact is that property rights and patents are another way to describe monopolies, and economists don’t like monopolies, especially government-regulated and -mandated ones. Extensive regulation is the price governments charge for granting certain pharmaceutical companies the right to sell drugs that are marked up many times the cost of their production, and with legal protection against competition. (For more on this, see Dean Baker’s “Bird Flu Fears: Is There a Better Way to Develop Drugs?,” an Issue Brief from the Center for Economic and Policy Research. Baker argues that if we eliminated monopolies, we’d free up enough money for amply supported government research centers.)

Conservatives trumpet the idea of putting control in the hands of the people. What’s hidden behind that lofty notion, though, is part of the great risk shift that Jacob Hacker discusses in his book. He begins with a graphic that shows the rising volatility of American family incomes over the last 30 years. While many progressives focus on the growing gap between rich and poor, Hacker argues that “the economic instability of American families has actually risen faster than economic inequality.” He documents the steadily growing likelihood of losing at least half of one’s income, from around 7 percent in 1970 to more than 16 percent in 2002. Further, he demonstrates that people in their prime working years were three times more likely to spend a year in poverty in the 1990s than they were in the 1970s, from a 13-percent chance in the 1970s to a more-than-36-percent chance in the 1990s.

In subsequent chapters, Hacker documents the increasing risks many Americans face not only from job loss, but also from the erosion of employer-provided health insurance, retirement plans, and other benefits. That unraveling of the safety net has caused not only real losses in income, but also growing “insecurity … the possibility of large economic shocks not covered by insurance.”

Much like a politician taking to the road, Hacker recounts the stories of people he meets, painting a disheartening picture of America. His recommendations hark back to New Deal notions of social insurance. Conservatives champion insurance policies for people “in close accordance with their expected probability of requiring help.” A personal-responsibility crusade forced individuals to take on more and more economic risks. But Hacker argues that in its heyday, “social insurance … was supposed to provide subsidized coverage to high-risk groups and those who couldn’t easily purchase commercial policies.”

In All Together Now: Common Sense for a Fair Economy, one of my colleagues at the Economic Policy Institute, Jared Bernstein, shares many of the ideas outlined by Hacker. Bernstein lays out a vision for society in the spirit of the revolutionary Thomas Paine,
who advocated a society that valued the interests of the many over those of the few. Bernstein pits the YOYO (you’re on your own) individualistic strategy against the WITT (we’re in this together) strategy to solve the health-care problem along with scores of others.

Both Hacker and Bernstein argue that conservative policy prescriptions will only exacerbate the problems that have increasingly afflicted many Americans over recent decades. By their very design, high-deductible plans offer patients more control, but at the cost of more risk. Yet medical costs are already the leading cause of bankruptcy, and a surprising number of those who declare bankruptcy for medical reasons were actually insured at the onset of illness.

The fundamental problem with high-deductible plans and health-savings accounts is that they do little or nothing to decrease the numbers of uninsured or to rein in health costs, arguably the two biggest problems with health care today. Savings accounts don’t benefit those with little or no tax liability, and 80 percent of health costs originate with 20 percent of Americans, suggesting that the big health dollars are being spent by the very sick few, often with chronic diseases. High-deductible plans encourage people to spend their health dollars more wisely, but that only works before the deductible is reached. Because the high-cost consumers spend far more than their deductibles in a given year, such plans would do little to stem high and rising costs.

Related proposals that would benefit the insurance market for individual buyers might further erode employer-provided plans, destabilizing employer risk pools and leaving some of the neediest buyers even more in the lurch. The individual market is already a daunting place to find health insurance. Conservatives celebrate its portability, but as the market is regulated today, the policy you buy this year may not be available the next. If you’re unfortunate enough to have a serious illness in the family, it can be impossible to find an affordable policy that will cover you for that illness.

OK, then, do progressives have any better ideas? Yes. Hacker urges shared risk and responsibility. He builds on the best examples of efficient, high-quality coverage today: the employer-provided health insurance received in large (and high-wage) firms, and Medicare. His plan, now called Health Care for America, preserves the ability of private insurers to compete while ensuring a safety net for all Americans.

Rather than pushing people into the perilous individual market, Hacker would strengthen and expand employer plans. People who have high-quality, comprehensive coverage through their jobs could keep it. For those who don’t, their employers could buy into a national health pool, like a Medicare for the nonelderly, which would provide workers and their families with comprehensive coverage.

The shared risk of a large pool would remove the discrimination that happens in the individual market and use the efficiencies of a Medicare-like system, with substantially lower administrative costs than in the private market. Hacker’s is an ambitious plan that has a good chance of making the transition from today’s piecemeal approach to universal, rational coverage with the least disruption.

President Bush, in his State of the Union address, echoed the health-finance prescriptions outlined in the conservative literature. He vowed to expand health-savings accounts, proposed a standard tax deduction for health insurance while removing the current tax benefit for workers and families on employer-provided plans, and sought to redirect federal support for the low-income and uninsured to state programs. Those moves would bolster the market for privately purchased health insurance; weaken the employer market; create incentives to buy the leanest, least-comprehensive plans; and remove services for those in need, instead giving uninsured families vouchers they could use to buy policies on their own.

In other words, conservatives know how to turn their visions into legislation. Now that the Democrats have regained control of Congress, we’ll see if they do, too. Let’s hope so, because they have better, fairer, and more-humane visions to work with.

Elise Gould is an economist at the Economic Policy Institute in Washington, D.C.


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